Labrador Iron Ore Royalty Corporation - Results for the Third Quarter Ended
Labrador Iron Ore Royalty Corporation -
Results for the Third Quarter Ended
September 30, 2019
TORONTO
,
Nov. 13, 2019
/CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC", TSX: LIF)
announced today its operation and cash flow results for the third quarter ended
September 30,
2019
.
Royalty revenue for the third quarter of 2019 amounted to
$45.5 million
, as compared to
$44.0
million
for the third quarter of 2018. Equity earnings from IOC amounted to
$32.0 million
or
$0.50
per share in the third quarter of 2019 as compared to
$30.6 million
or
$0.48
per share in the third
quarter of 2018. Net income was
$57.5 million
or
$0.90
per share for the third quarter of 2019
compared to
$58.1 million
or
$0.91
per share for the same period in 2018. Cash flow from
operations for the third quarter was
$72.6 million
or
$1.13
per share as compared to
$59.7 million
or
$0.93
per share for the same period in 2018. LIORC received a dividend from Iron Ore Company of
Canada
("IOC") in the third quarter of 2019 in the amount of
$40.1 million
or
$0.63
per share, as
compared to
$58.6 million
or
$0.92
per share in the third quarter of 2018.
The royalty revenue, cash flow from operations and equity earnings for the third quarter of 2019
were marginally higher than the third quarter of 2018, as a result of lower sales tonnages offset by
higher realized prices.
The average price for the Platts index for 62%
Fe Iron Ore
, CFR China ("62% Fe index") increased
53% to
US$102
per tonne in the third quarter of 2019 compared to the average price in the third
quarter of 2018 of
US$67
per tonne. IOC's total sales tonnage for calculating the royalty payable to
LIORC on concentrate for sale ("CFS") plus pellets of 4.5 million tonnes was 17% lower in the third
quarter of 2019 compared to the same period in 2018, largely as a result of pellet tonnages being
27% lower due to lower pellet production amounts, changes in customer demand and timing of
shipments. The CFS sales tonnages in the third quarter of 2019 were 7% lower than in the third
quarter of 2018 mainly due to timing.
LIORC's results for the three months and nine months ended
September 30
are summarized below:
(in millions except per share information)
3 Months
Ended
Sept. 30,
2019
3 Months
Ended
Sept. 30,
2018
9 Months
Ended
Sept. 30,
2019
9 Months
Ended
Sept. 30,
2018
(Unaudited)
Revenue
$46.2
$44.6
$138.7
$84.1
Cash flow from operations
$72.6
$59.7
$145.4
$95.5
Operating cash flow per share
$1.13
$0.93
$2.27
$1.49
Net income
$57.5
$58.1
$157.9
$85.1
Net income per share
$0.90
$0.91
$2.47
$1.33
Iron Ore Company of Canada Operations
Production
Total concentrate production in the third quarter of 2019 was 5.4 million tonnes, as a result of better
weight yield in September offsetting lower throughput in July and August. This was 7% higher than
the third quarter of 2018, and 19% higher than the second quarter of 2019, which was negatively
impacted by a delay in the restart after the planned annual outage in June as a result of a flooding
issue. Pellet production as a percentage of total production was lower for the quarter as pellet
production was negatively impacted by lower induration machine availability. As a result, pellet
production in the third quarter of 2019 of 2.7 million tonnes was 11% lower than the third quarter of
2018 but 17% higher than the previous quarter. CFS production in the third quarter of 2019 of 2.4
million tonnes was 24% higher than in the third quarter of 2018 and 17% higher than the previous
quarter.
Total concentrate production for the nine months of 2019 was 14.3 million tonnes. This was 34%
higher than the same period in the prior year, largely as a result of the work stoppage experienced
during the second quarter of 2018.
Sales as Reported for the LIORC Royalty
Total iron ore tonnage sold by IOC (CFS plus pellets) of 4.5 million tonnes was 17% lower in the
third quarter of 2019 compared to the same period in 2018 largely as a result of pellet sales
tonnages being 27% lower than in the same period in 2018. The CFS sales tonnages in the third
quarter of 2019 were 7% lower than in the third quarter of 2018. As stated above, pellet sales
tonnages were lower as a result of lower pellet production and changes in customer demand. In
addition, sales of pellets and CFS were also lower due to timing and breakdowns on Reclaimer 1
and Shiploader 3 at the terminal in September.
Total iron ore tonnage sold by IOC (CFS plus pellets) for the nine months of 2019 was 12.6 million
tonnes. This was 28% higher than the same period in the prior year, largely as a result of the work
stoppage experienced during the second quarter of 2018.
IOC sells CFS based on the Platts index for 65%
Fe Iron Ore
, CFR China ("65% Fe index"). The
average price for the 65% Fe index was
US$110
per tonne in the third quarter of 2019, a 17%
increase over the average price in the third quarter of 2018 of
US$94
per tonne, and 5% lower than
the average price in the second quarter of 2019 of
US$115
per tonne. While the average seaborne
iron ore prices remained attractive from a historical perspective, significant declines in pricing
occurred during the quarter, as increased supply came to market and steel producers struggling with
low margins cut back on demand. Steel producers continued to substitute higher quality iron ore with
cheaper lower quality iron ore. As a result, the premium for the 65% Fe index compared to the 62%
Fe index, which had been expanding over the last few years decreased in the third quarter of 2019
to 7%, as compared to 41% in the third quarter of 2018 and 15% in the second quarter of 2019.
Pellet premiums also decreased as high underlying benchmark prices caused buyers to reduce
demand. The quarterly Atlantic Basin blast furnace pellet premium, as reported by Platts, averaged
US$56
per tonne in the third quarter of 2019, a 3% decrease over the third quarter of 2018 and 17%
lower than the second quarter of 2019.
A summary of IOC's sales for calculating the royalty to LIORC in millions of tonnes is as follows:
3 Months
Ended
Sept. 30,
2019
3 Months
Ended
Sept. 30,
2018
9 Months
Ended
Sept. 30,
2019
9 Months
Ended
Sept. 30,
2018
Year
Ended
Dec. 31,
2018
Pellets
2.04
2.79
7.17
5.81
8.41
Concentrates
(1)
2.46
2.64
5.43
4.04
6.70
Total
(2)
4.51
5.43
12.60
9.86
15.10
(1)
Excludes third party ore sales
(2)
Totals may not add up due to rounding
Outlook
IOC's total saleable production (CFS and pellets) for the first nine months was 13.6 million tonnes. In
its third quarter operations review, Rio Tinto maintained the 2019 full year guidance for IOC's
saleable production (CFS and pellets) on a 100% basis at between 18.2 and 19.3 million tonnes.
Lower third quarter sales due to timing and breakdowns on Reclaimer 1 and Shiploader 3, resulted
in an increase of inventories at the Terminal. IOC expects to reduce those inventories to more typical
levels in the fourth quarter.
Despite significant price declines from peak pricing in July, benchmark prices for concentrate remain
attractive relative to historical levels. The average price in October for the 62% Fe index was
US$90
per tonne as compared to the average in September of
US$93
per tonne and the average for
the third quarter of
US$102
per tonne. On
November 12, 2019
the price for the 62% Fe index was
US$81
. Premiums for higher grade concentrate and pellets remain under pressure as steel
producers reduce demand and continue to substitute lower grade product for higher quality
product.
On
October 25
Vale announced that Samarco is expected to restart its operations by the end of
2020, following the construction of a filtration system. Samarco expects to be able to produce
approximately 7 to 8 million tonnes per annum of pellets. According to Vale, a second concentrator
could be restarted in approximately 6 years to reach a range of production of approximately 14 to
16 million tonnes per annum, and the restart of the third concentrator could happen in about 10
years, when Samarco expects to reach annual production volume in a range of approximately 22 to
24 million tonnes. While the restart will bring added supply to the market, the announced restart
schedule outlines a slower ramp-up of production than many industry commentators had anticipated.
The LIORC net working capital (current assets less current liabilities) as at
September 30, 2019
was
$29.2 million
. During the third quarter net working capital increased by
$1.6 million
as a result
of adjusted cash flow of
$65.6
less declared dividends of
$64.0 million
.
Respectfully submitted on behalf of the Directors of Labrador Iron Ore Royalty Corporation,
John F. Tuer
President and Chief Executive Officer
November 13, 2019
Management's Discussion and Analysis
The following discussion and analysis should be read in conjunction with the Management's
Discussion and Analysis section of the Corporation's 2018 Annual Report, and the financial
statements and notes contained therein and the
September 30, 2019
interim condensed
consolidated financial statements. The Corporation's revenues are entirely dependent on the
operations of IOC as its principal assets relate to the operations of IOC and its principal source of
revenue is the 7% royalty it receives on all sales of iron ore products by IOC. In addition to the
volume of iron ore sold, the Corporation's royalty revenue is affected by the price of iron ore and the
Canadian – U.S. dollar exchange rate.
The first quarter sales of IOC are traditionally adversely affected by the closing of the St. Lawrence
Seaway and general winter operating conditions and are usually 15% – 20% of the annual volume,
with the balance spread fairly evenly throughout the other three quarters. Because of the size of
individual shipments, some quarters may be affected by the timing of the loading of ships that can be
delayed from one quarter to the next.
The royalty revenue, cash flow from operations and equity earnings for the third quarter of 2019
were marginally higher than the third quarter of 2018, as a result of lower sales tonnages offset by
higher realized prices.
Royalty revenue for the third quarter of 2019 amounted to
$45.5 million
, as compared to
$44.0
million
for the third quarter of 2018. Equity earnings from IOC amounted to
$32.0 million
or
$0.50
per share in the third quarter of 2019 as compared to
$30.6 million
or
$0.48
per share in the third
quarter of 2018. Net income was
$57.5 million
or
$0.90
per share for the third quarter of 2019
compared to
$58.1 million
or
$0.91
per share for the same period in 2018. Cash flow from
operations for the third quarter was
$72.6 million
or
$1.13
per share as compared to
$59.7 million
or
$0.93
per share for the same period in 2018. LIORC received a dividend from IOC in the third
quarter of 2019 in the amount of
$40.1 million
or
$0.63
per share, as compared to
$58.6 million
or
$0.92
per share in the third quarter of 2018.
The average price for 62% Fe index increased 53% to
US$102
per tonne in the third quarter of 2019
compared to the average price in the third quarter of 2018 of
US$67
per tonne. IOC's total sales
tonnage for calculating the royalty payable to LIORC on - CFS plus pellets of 4.5 million tonnes was
17% lower in the third quarter of 2019 compared to the same period in 2018, largely as a result of
pellet tonnages being 27% lower than in the same period in 2018 due to lower pellet production
amounts, changes in customer demand and timing of shipments. The CFS sales tonnages in the third
quarter of 2019 were 7% lower than in the third quarter of 2018 mainly due to timing.
Total concentrate production in the third quarter of 2019 was 5.4 million tonnes, as a result of better
weight yield in September offsetting lower throughput in July and August. This was 7% higher than
the third quarter of 2018, and 19% higher than the second quarter of 2019, which was negatively
impacted by a delay in the restart after the planned annual outage in June as a result of a flooding
issue. Pellet production as a percentage of total production was lower for the quarter as pellet
production was negatively impacted by lower induration machine availability. As a result, pellet
production in the third quarter of 2019 of 2.7 million tonnes was 11% lower than the third quarter of
2018 but 17% higher than the previous quarter. CFS production in the third quarter of 2019 of 2.4
million tonnes was 24% higher than in the third quarter of 2018 and 17% higher than the previous
quarter.
Total concentrate production for the nine months of 2019 was 14.3 million tonnes. This was 34%
higher than the same period in the prior year, largely as a result of the work stoppage experienced
during the second quarter of 2018.
Total iron ore tonnage sold by IOC (CFS plus pellets) of 4.5 million tonnes was 17% lower in the
third quarter of 2019 compared to the same period in 2018 largely as a result of pellet sales
tonnages being 27% lower than in the same period in 2018. The CFS sales tonnages in the third
quarter of 2019 were 7% lower than in the third quarter of 2018. As stated above, pellet sales
tonnages were lower as a result of lower pellet production and changes in customer demand. In
addition, sales of pellets and CFS were also lower due to timing and breakdowns on Reclaimer 1
and Shiploader 3 at the terminal in September.
Total iron ore tonnage sold by IOC (CFS plus pellets) for the nine months of 2019 was 12.6 million
tonnes. This was 28% higher than the same period in the prior year, largely as a result of the work
stoppage experienced during the second quarter of 2018.
IOC sells CFS based on the 65% Fe index. The average price for the 65% Fe index was
US$110
per tonne in the third quarter of 2019, a 17% increase over the average price in the third quarter of
2018 of
US$94
per tonne, and 5% lower than the average price in the second quarter of 2019 of
US$115
per tonne. While the average seaborne iron ore prices remained attractive from a historical
perspective, significant declines in pricing occurred during the quarter, as increased supply came to
market and steel producers struggling with low margins cut back on demand. Steel producers
continued to substitute higher quality iron ore with cheaper lower quality iron ore. As a result, the
premium for the 65% Fe index compared to the 62% Fe index, which had been expanding over the
last few years decreased in the third quarter of 2019 to 7%, as compared to 41% in the third
quarter of 2018 and 15% in the second quarter of 2019. Pellet premiums also decreased as high
underlying benchmark prices caused buyers to reduce demand. The quarterly Atlantic Basin blast
furnace pellet premium, as reported by Platts, averaged
US$56
per tonne in the third quarter of
2019, a 3% decrease over the third quarter of 2018 and 17% lower than the second quarter of
2019.
Results for the nine months were affected by the same factors as affected the three month period.
Royalty and commission interests amortization expense increased by
$1.1 million
for the nine months
compared to the same period in 2018 due to the increase in production. The 2018 production was
negatively impacted by a nine-week work stoppage.
The following table sets out quarterly revenue, net income, cash flow and dividend data for 2019,
2018 and 2017.
Revenue
Net
Income
Net Income
per Share
Cash
Flow
Cash Flow
from
Operations
per Share
Adjusted
Cash Flow
per Share
(1)
Dividends
Declared per
Share
(in millions except per share information)
2019
First Quarter
$39.2
$39.3
$0.61
$25.0
$0.39
$0.34
$1.05
Second Quarter
$53.3
$61.1
$0.95
$47.8
(2)
$0.75
(2)
$0.86
(2)
$0.90
Third Quarter
$46.2
$57.5
$0.90
$72.6
(3)
$1.13
(3)
$1.02
(3)
$1.00
2018
First Quarter
$34.3
$30.3
$0.47
$20.3
$0.32
$0.29
$0.35
Second Quarter
$5.2
$(3.2)
$(0.05)
$15.5
$0.24
$0.04
$0.25
Third Quarter
$44.6
$58.1
$0.91
$59.7
(4)
$0.93
(4)
$1.30
(4)
$0.55
Fourth Quarter
$46.8
$43.4
$0.68
$53.3
(5)
$0.83
(5)
$0.79
(5)
$0.60
2017
First Quarter
$43.4
$42.9
$0.67
$28.2
(6)
$0.44
(6)
$0.53
(6)
$0.50
Second Quarter
$34.2
$32.3
$0.50
$45.6
(7)
$0.71
(7)
$0.53
(7)
$0.60
Third Quarter
$40.4
$43.8
$0.69
$53.6
(8)
$0.84
(8)
$0.85
(8)
$1.00
Fourth Quarter
$40.6
$38.3
$0.60
$39.6
(9)
$0.62
(9)
$0.65
(9)
$0.55
(1)
"Adjusted cash flow" (see below)
(2)
Includes $25.4 million IOC dividend.
(3)
Includes $40.1 million IOC dividend.
(4)
Includes $58.6 million IOC dividend.
(5)
Includes $25.3 million IOC dividend.
(6)
Includes $10.0 million IOC dividend.
(7)
Includes $15.2 million IOC dividend.
(8)
Includes $32.2 million IOC dividend.
(9)
Includes $19.3 million IOC dividend.
Standardized Cash Flow and Adjusted Cash Flow
For the Corporation, standardized cash flow is the same as cash flow from operating activities as
recorded in the Corporation's cash flow statements as the Corporation does not incur capital
expenditures or have any restrictions on dividends. Standardized cash flow per share was
$1.13
for
the quarter (2018 -
$0.93
). Cumulative standardized cash flow from inception of the Corporation is
$29.74
per share and total cash distributions since inception is
$29.29
per share, for a payout ratio
of 99%.
The Corporation also reports "Adjusted cash flow" which is defined as cash flow from operating
activities after adjustments for changes in amounts receivable, accounts payable and income taxes
recoverable and payable. It is not a recognized measure under International Financial Reporting
Standards ("IFRS"). The Directors believe that adjusted cash flow is a useful analytical measure as
it better reflects cash available for dividends to shareholders.
The following reconciles standardized cash flow from operating activities to adjusted cash flow (in
'000's).
3 Months
Ended
Sept. 30,
2019
3 Months
Ended
Sept. 30,
2018
9 Months
Ended
Sept. 30,
2019
9 Months
Ended
Sept. 30,
2018
Standardized cash flow from operating activities
$72,646
$59,756
$145,446
$95,529
Changes in amounts receivable, accounts payable and income taxes payable
(7,049)
23,325
(3,557)
8,524
Adjusted cash flow
$65,597
$83,081
$141,889
$104,053
Adjusted cash flow per share
$1.02
$1.30
$2.22
$1.63
Liquidity and Capital Resources
The Corporation had
$62.7 million
in cash as at
September 30, 2019
(
December 31, 2018
-
$80.5
million
) with total current assets of
$112.9 million
(
December 31, 2018
-
$127.0 million
). The
Corporation had working capital of
$29.1 million
as at
September 30, 2019
(
December 31, 2018
-
$76.3 million
). The Corporation's operating cash flow for the quarter was
$72.6 million
and the
dividend paid during the quarter was
$57.6 million
, resulting in cash balances increasing by
$15.0
million
during the third quarter of 2019.
Cash balances consist of deposits in Canadian dollars with Canadian chartered banks. Amounts
receivable primarily consist of royalty payments from IOC. Royalty payments are received in U.S.
dollars and converted to Canadian dollars on receipt, usually 25 days after the quarter end. The
Corporation does not normally attempt to hedge this short-term foreign currency exposure.
Operating cash flow of the Corporation is sourced entirely from IOC through the Corporation's 7%
royalty,
10 cents
commission per tonne and dividends from its 15.10% equity interest in IOC. The
Corporation normally pays cash dividends from its net income to the maximum extent possible,
subject to the maintenance of appropriate levels of working capital.
The Corporation has a
$30 million
revolving credit facility with a term ending
September 18, 2022
with provision for annual one-year extensions. No amount is currently drawn under this facility (2018
– nil) leaving
$30.0 million
available to provide for any capital required by IOC or requirements of the
Corporation.
Outlook
IOC's total saleable production (CFS and pellets) for the first nine months was 13.6 million tonnes. In
its third quarter operations review, Rio Tinto maintained the 2019 full year guidance for IOC's
saleable production (CFS and pellets) on a 100% basis at between 18.2 and 19.3 million tonnes.
Lower third quarter sales due to timing and breakdowns on Reclaimer 1 and Shiploader 3, resulted
in an increase of inventories at the Terminal. IOC expects to reduce those inventories to more typical
levels in the fourth quarter.
Despite significant price declines from peak pricing in July, benchmark prices for concentrate remain
attractive relative to historical levels. The average price in October for the 62% Fe index was
US$90
per tonne as compared to the average in September of
US$93
per tonne and the average for
the third quarter of
US$102
per tonne. On
November 12, 2019
the price for the 62% Fe index was
US$81
. Premiums for higher grade concentrate and pellets remain under pressure as steel
producers reduce demand and continue to substitute lower grade product for higher quality
product.
On
October 25
Vale announced that Samarco is expected to restart its operations by the end of
2020, following the construction of a filtration system. Samarco expects to be able to produce
approximately 7 to 8 million tonnes per annum of pellets. According to Vale, a second concentrator
could be restarted in approximately 6 years to reach a range of production of approximately 14 to
16 million tonnes per annum, and the restart of the third concentrator could happen in about 10
years, when Samarco expects to reach annual production volume in a range of approximately 22 to
24 million tonnes. While the restart will bring added supply to the market, the announced restart
schedule outlines a slower ramp-up of production than many industry commentators had anticipated.
The LIORC net working capital (current assets less current liabilities) as at
September 30, 2019
was
$29.2 million
. During the third quarter net working capital increased by
$1.6 million
as a result
of adjusted cash flow of
$65.6
less declared dividends of
$64.0 million
.
Respectfully submitted on behalf of the Directors of Labrador Iron Ore Royalty Corporation,
John F. Tuer
President and Chief Executive Officer
November 13, 2019
Forward-Looking Statements
This report may contain "forward-looking" statements that involve risks, uncertainties and other
factors that may cause the actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by such forward-looking
statements. Words such as "may", "will", "expect", "believe", "plan", "intend", "should", "would",
"anticipate" and other similar terminology are intended to identify forward-looking statements. These
statements reflect current assumptions and expectations regarding future events and operating
performance as of the date of this report. Forward-looking statements involve significant risks and
uncertainties, should not be read as guarantees of future performance or results, and will not
necessarily be accurate indications of whether or not such results will be achieved. A number of
factors could cause actual results to vary significantly, including iron ore price and volume volatility,
exchange rates, the performance of IOC, market conditions in the steel industry, mining risks and
insurance, the renewal of the mining leases, outcomes of existing or
future litigation, relationships with aboriginal groups, changes affecting IOC's customers, competition
from other iron ore producers, estimates of reserves and resources and government regulation and
taxation. A discussion of these factors is contained in LIORC's annual information form dated
March
7, 2019
under the heading, "Risk Factors". Although the forward-looking statements contained in this
report are based upon what management of LIORC believes are reasonable assumptions, LIORC
cannot assure investors that actual results will be consistent with these forward-looking statements.
These forward-looking statements are made as of the date of this report and LIORC assumes no
obligation, except as required by law, to update any forward-looking statements to reflect new
events or circumstances. This report should be viewed in conjunction with LIORC's other publicly
available filings, copies of which can be obtained electronically on SEDAR at
www.sedar.com
.
Notice:
The following unaudited interim condensed consolidated financial statements of the Corporation have
been prepared by and are the responsibility of the Corporation's management. The Corporation's
independent auditor has not reviewed these interim financial statements.
LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at
September 30,
December 31,
(in thousands of Canadian dollars)
2019
2018
(Unaudited)
Assets
Current Assets
Cash and short-term investments
$
62,741
$
80,495
Amounts receivable
50,204
46,548
Total Current Assets
112,945
127,043
Non-Current Assets
Iron Ore Company of Canada ("IOC")
royalty and commission interests
249,250
253,846
Investment in IOC
403,908
382,704
Total Non-Current Assets
653,158
636,550
Total Assets
$
766,103
$
763,593
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable
$
10,572
$
9,969
Dividend payable
64,000
38,400
Taxes payable
9,223
2,613
Total Current Liabilities
83,795
50,982
Non-Current Liabilities
Deferred income taxes
123,680
121,760
Total Liabilities
207,475
172,742
Shareholders' Equity
Share capital
317,708
317,708
Retained earnings
249,784
280,759
Accumulated other comprehensive loss
(8,864)
(7,616)
558,628
590,851
Total Liabilities and Shareholders' Equity
$
766,103
$
763,593
Approved by the Directors,
John F. Tuer
Patricia M. Volker
Director
Director
LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months Ended
September 30,
(in thousands of Canadian dollars except for per share information)
2019
2018
(Unaudited)
Revenue
IOC royalties
$
45,484
$
43,979
IOC commissions
443
534
Interest and other income
259
43
46,186
44,556
Expenses
Newfoundland royalty taxes
9,097
8,796
Amortization of royalty and commission interests
1,663
1,733
Administrative expenses
787
842
11,547
11,371
Income before equity earnings and income taxes
34,639
33,185
Equity earnings in IOC
32,002
30,600
Income before income taxes
66,641
63,785
Provision for income taxes
Current
10,874
10,429
Deferred
(1,704)
(4,705)
9,170
5,724